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How To Invest and Save Money
Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
When you are putting together your pension plan, you need to remember that a combination of stocks and bonds is the smartest way to go. Stocks & Bonds: The Basic Building Blocks for Any Retirement Portfolio By Britt Erica Tunick From stock and bonds, to mutual funds, individual retirement accounts, 401K’s and exchange traded funds there are a ton of investment options available in the marketplace and deciding which one makes the most sense when planning for retirement can be difficult. Fortunately, creating a good investment strategy for retirement doesn’t mean the need to choose an individual investment vehicle. In fact, it’s just the opposite: the key to creating an investment portfolio able to generate steady long-term returns is diversification. And the two most basic ingredients for any retirement investment portfolio are stocks and bonds. Quite simply, where there are stocks there should also be bonds. While we’ve all heard about individuals who’ve become overnight millionaires or billionaires by choosing the right stock to invest in, doing so isn’t easy, if it was everyone would be rich. In reality, the stock market is unpredictable and unexpected events such as the explosion of the dot.com bubble, the collapse of high profile companies such as Enron and the turmoil created by the credit crisis have demonstrated just how volatile stocks can be and how fast the value of individual stocks can plummet. Nonetheless, stocks remain a staple ingredient in any long-term investment portfolio and still provide the greatest potential for wealth generation over significant periods of time. Despite the stock market’s continuous ups and downs, and even worldwide collapses such as the Great Depression and or the more recent credit crisis, stocks have historically averaged returns of 7% over any 10 year period of time. But since there is no way to predict when the down periods will occur, it is important to keep a portion of any investment portfolio allocated to bonds which provide more steady and predictable returns and are less subject to the major ups and downs of the marketplace. Unlike individual stocks whose value is tied to market sentiment and investor behavior, bonds are essentially loans made to government entities or corporations where the borrower agrees to repay the loan along with a fixed interest rate for a pre-determined period of time. As a result, financial advisors have long suggested that a mix of stocks and bonds is the best way to eliminate the risk of major swings in the long-term returns of any individual investment portfolio. There are a variety of formulas that have become popular for determining the mix of stocks versus bonds in any one individual investment portfolio –from the suggestion to allocate a percentage of the portfolio equal to the investor’s age to bond, to more complex formulas that factor in everything from age to the income goal an individual ultimately has for their investments. One thing experts across the board agree on is that younger investors should consider allocating more of their money to stocks –and the higher returns they promise, while individuals closer to retirement should be more conservative and should keep a larger percentage of their holdings in stocks and steadier investment vehicles. Beyond choosing a mix of stocks and bonds, individuals saving for retirement should also make sure that the investments they make aren’t limited to any one sector of the market. A basket of 20 different technology stocks all within the technology sector is likely to prove a nightmare for the individual holding those equities if an event like the dot.com bubble occurs where technology stocks universally plummet. Similarly, investing too heavily in only the safest type of bonds such as Treasuries (debt secured by the U.S. government), and foregoing higher yielding bonds with lower ratings (known as junk bonds) can be equally unattractive, especially within low interest rate environments. A mix of stocks and bonds should be the foundation for any retirement portfolio, but they are just the beginning. Investors seeking true diversification in their retirement planning should look at all their options –from mutual funds, to real estate investment trusts and a multitude of other investment vehicles. As always, for anyone unfamiliar with investing the best place to begin is a conversation with a qualified and experienced investment professional to help determine your needs and the best ways to meet them. But perhaps the most important thing to consider when investing for retirement is that you can never start too soon and the earlier you do begin, the better you are likely to find yourself positioned when retirement ultimately rolls around. |
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